Defense Contractor Fraud

The federal False Claims Act broadly prohibits anyone who does business with the federal government from engaging in fraudulent behavior. Accordingly, there are innumerable circumstances where such fraud may occur, and in which a Whistleblower may bring an action to expose the fraud and recover appropriate damages. An example of such fraud includes:

When it comes to defense contracts, it is important for Whistleblowers to point out fraudulent claims to help protect the government and taxpayers from unnecessary expenses. Defense contractor fraud remains one of the biggest areas for False Claims Act litigation. Persons who choose to bring a lawsuit against a defense contractor who is collecting money on the basis of false or fraudulent claims are given freedom to do so under the False Claims Act.

Types of Defense Contract Fraud

Defense contract fraud can come in many different forms, and the government relies heavily on Whistleblowers to help expose new schemes and fraudulent actions. Defense contract fraud may include:

Cross-Charging/Upcharging

Cross-charging has been one of the most common types of defense procurement fraud. Cross-charging occurs when a defense contractor improperly shifts costs and expenses from one defense contract to another in order to boost its profits.

The United States typically awards one of two types of contracts in defense procurement: (1) the “fixed-price” contract; and (2) the “cost-plus contract.” In a “fixed-price” contract, the government pays the contractor a set price for the delivery of a weapons system or other product, no matter how much it costs the contractor to produce. In a “cost-plus” contract, the government pays the contractor a set price plus a percentage of the contractor’s costs for producing the weapons system or other product. Defense contractors that have both of these types of contracts have a strong financial incentive to shift costs from the “fixed-price” contract to the “cost-plus” contract, and thereby maximize the contractor’s profits. This illegal cross-charging is frequently accomplished by altering records to shift employee hours and equipment costs from the “fixed-price” contract to the “cost-plus” contract.

Overcharging/Overbilling

Overcharging can occur in various formats. The Government utilizes contracts with various agencies and companies to provide products and services. Oftentimes the Government ends up paying more than it should for those products and services due to the billing a company performs.

Defense contractors who provide products and services to the United States military also sell those products, in some form or another, to foreign governments and private businesses around the world. One way that some defense contractors have attempted to secure lucrative contracts from private businesses or foreign governments, is to improperly allocate or shift costs from those contracts onto the “cost-plus” contracts they have with the United States government. As a result of this scheme, the United States ends up paying for the costs that should be paid by these private businesses or foreign governments.

Overbilling the United States government can incur in any number of ways, including:

Billing for services or products that were not provided;

Shifting the costs of a fixed price contract to the costs of a cost-plus contract that the contractor may also maintain with the Department of Defense (DOD) or a DOD prime contractor; and

Inflating the cost absent of any justification.

Use of cheap or inferior products on the project or provide defective parts not manufactured in accordance with specification.

The United States government frequently specifies that its defense contractors build products using a certain grade or quality of parts. Further, the government requires that the parts be purchased from American companies. Substitution or deviation for any of the specifications of the contract must be approved by the government contracting officer.

The Defense Department requires its contractors to build those systems in accordance with very detailed product specifications. These specifications dictate not only the type of materials to be used for the contract, but also appropriate quality assurance steps that the company must follow to ensure the quality of the product.

If a company starts to overrun its budget on a contract, or falls behind in its delivery schedule, it may cut corners by omitting required testing, quality procedures, or other steps in the production process. This may lead the company to send the government products with defects, therefore fraud against the government will exist.

Failure to complete the project to government requirements

The government is very specific as to how the project should be carried out with specific environmental compliance that needs to be met. The labor standards for the health and safety protections for the workers should not be compromised during the project. Any attempt to cut corners, or alter these requirements knowingly may form the basis for a False Claim Act case.

Failure to Disclose all relevant information about its costs

When the government wants to buy some extra stealth bombers, it cannot simply solicit the best bid from a number of different companies. Highly specialized weapons systems often must be purchased from the single company that already makes them, known as a “sole-source supplier.”

The problem for the government is to ensure that it pays a fair price, since it cannot put out the contract for competitive bids. The Truth In Negotiations Act (TINA) requires the contractor to truthfully disclose all relevant information about its costs to the government in “sole-source” contract negotiations.

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